TREASURY INSPECTOR GENERAL FOR TAX
ADMINISTRATION

Coordination and Procedures for Foreclosures Can Be
Improved

September 21, 2010

Reference Number:2010-30-119

This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.

Redaction
Legend:

1 = Tax
Return/Return Information

Phone
Number |202-622-6500

Email Address |inquiries@tigta.treas.gov

Web Site|http://www.tigta.gov

HIGHLIGHTS

COORDINATION
AND Procedures For Foreclosures Can Be
Improved

Highlights

Final Report issued on September 21, 2010

Highlights of Reference Number: 2010-30-119 to the Internal Revenue Service
Deputy Commissioner for Servicesand Enforcement.

IMPACT ON TAXPAYERS

When
property has a Federal Tax Lien attached, the Internal Revenue Service (IRS) may
participate in the collection of any proceeds from foreclosure sales.The IRS was inconsistent in how it processed
foreclosure cases and coordinated with local United States Attorneys' Offices
(USAO).If the IRS does not properly
work these cases, taxpayers may miss an opportunity to reduce the amount of
taxes owed because any funds collected are applied to the taxpayer’s Federal
Tax Lien balance.

WHY TIGTA DID THE AUDIT

Because of the increase in home
mortgage foreclosures, this audit was initiated to determine whether the IRS Advisory
Unit (Advisory) is effectively and efficiently protecting the Federal Government’s
interest during foreclosure proceedings when there is a Notice of Federal Tax
Lien filed.

WHAT TIGTA
FOUND

The
USAO is the control point for judicial foreclosure proceedings. The Advisory acts in a supporting role by providing
necessary information to the USAO to protect the Federal Government’s
interest.Although the Advisory does not
have jurisdiction for judicial foreclosures, coordination between the two
offices needs to be improved in some areas. The Advisory did not always follow up to
verify whether the USAO was properly and timely filing a claim to collect
potential surplus proceeds or to determine if the Advisory’s recommendations
for releasing the right of redemption were being followed. In addition, the Advisory did not always have
adequate sale information to consider potential redemption of the property
after a foreclosure sale.

Unlike judicial foreclosures, the
Advisory is the control point for non-judicial foreclosure cases.The information the IRS provides to the public
for submitting a timely notice of sale to the Advisory is not consistent with
the Internal Revenue Code.Specifically,
the Advisory uses the postmark date to determine if the notice is timely. However, information provided to the public
states timeliness is established by the receipt date.In addition, the Advisory did not always
properly screen the notice of sale or provide sufficient documentation to
support why the notices were rejected.Finally, the Advisory was not consistent when making a determination for
requests to release the right of redemption.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the Director, Collection, Small
Business/Self-Employed Division, ensure: 1) the Advisory provides timely information
regarding the application of any surplus proceeds and timely recommendations
regarding the value of any releases of rights of redemptions; 2) the Advisory
has sufficient information to consider potential redemption of foreclosed
properties; 3) communications with the public are consistent with the tax law; 4)
foreclosure files include evidence supporting rejection of notices of sale; and
5) releases of the rights of redemption are timely and appropriate.

In
their response to the report, IRS officials agreed with all of our
recommendations and plan to take corrective actions.

This report presents the results of our review to determine
whether the IRS Advisory Unit is effectively and efficiently protecting the
Federal Government’s interest during foreclosure proceedings when there is a Notice of Federal Tax Lien filed.This review is included in our Fiscal Year 2010
Annual Audit Plan and addresses the major management challenge of Tax
Compliance Initiatives.

Management’s complete response to the draft report is included
as Appendix V.

Copies of
this report are also being sent to the IRS managers affected by the report
recommendations.Please contact me at
(202) 622-6510 if you have questions or Margaret E. Begg, Assistant Inspector
General for Audit (Compliance and Enforcement Operations), at (202) 622-8510.

The Internal
Revenue Service (IRS) has the authority to attach a claim to a taxpayer’s
assets when the taxpayer neglects or refuses to pay his or her unpaid taxes.[1]This
claim is referred to as a Federal Tax Lien (FTL)[2] and attaches to different types of property.The IRS files a Notice of Federal Tax Lien
(NFTL) (Form 668(Y)), in appropriate local government offices, which notifies
interested parties that a lien exists and establishes the IRS’ priority
among secured creditors for the taxpayers’ equity.

Home mortgage foreclosures have reached
record levels.

Real property
with an NFTL attached can also be subject to foreclosure.A mortgage foreclosure happens when a
mortgage holder, typically a bank, compels the sale of a property because of
nonpayment of the mortgage debt.Home mortgage foreclosures have risen dramatically
across the Nation in recent years due to increased subprime mortgage lending[3] and interest rate changes on adjustable rate
mortgages.Despite recent legislative
action and increased levels of loan modification activity, foreclosure activity
continues to increase to record levels.

RealtyTrac®, an
online marketplace for foreclosure properties, showed 3,957,643
foreclosure filings were reported on 2,824,674 United States properties in
Calendar Year (CY) 2009.Foreclosure
filings include default notices, scheduled foreclosure auctions, and bank
repossessions.These filings represent a
21 percent increase in total property foreclosures from CY 2008 and a 120
percent increase from CY 2007.Figure 1
shows that in CY 2009, 1 in 45 (2.22 percent) housing units received at least 1
filing during the year, which is a dramatic rise from 0.58 percent in CY 2006.

Figure 1:Percentage of United States Housing Units
Receiving
at Least One Foreclosure Filing During CYs 2006 through 2009

Figure 1 was
removed due to its size.To see Figure
1, please go to the Adobe PDF version of the report on the TIGTA Public Web
Page.

Each State handles real estate foreclosures differently, as
foreclosure proceedings are dependent upon local law.There are two types of foreclosures: judicial and non-judicial.[4]

·Judicial foreclosures occur in States where the
sale or disposition is compelled by the authority of the court, beginning with
the lender filing a complaint and recording a Notice of Lis Pendens (meaning “action pending”).Once the court declares a foreclosure, the
property will then be auctioned to the highest bidder.

Non-judicial
foreclosures occur in States where the sale or disposition can be made
without a court proceeding.Generally, to begin the foreclosure process, the mortgage company
sends a notice of default or a notice of sale to the homeowner and files a
recording in the county recorder’s office.Most States have a requisite time period that must pass before the
foreclosure sale can take place.After this time period lapses, a public foreclosure auction is held
and the property is sold to the highest bidder.

In judicial foreclosure States, the United States Attorney’s
Office (USAO) is the control point for protecting the Federal Government’s
interest in the foreclosure proceedings, and the IRS’ Advisory Units (Advisory)
act in a supporting role.In
non-judicial foreclosure States, the Advisory is the central control point for
protecting the Federal Government’s interest in the foreclosure proceedings. The Advisory is part of the IRS’ Collection
function within the Small Business/Self-Employed Division.

When a property subject to an FTL is sold in a
foreclosure auction, the Federal Government has certain rights it may
exercise.Specifically, the Federal
Government may collect from the surplus proceeds, exercise its right of
redemption, or choose to release the right of redemption as follows:

·Surplus proceeds occur when a foreclosed
property is sold for an amount more than sufficient to satisfy the mortgage or
other liens that were filed prior to those of the IRS (known as senior liens). If surplus proceeds exist, the Federal Government
has a right to collect these funds to apply them to the FTL balance.

·Exercising
the right of redemption is the process by which the Advisory may purchase the
property from the party who bought the property at the foreclosure sale.[5]The purpose for redeeming a foreclosure
property is to allow the Federal Government an opportunity to resell the
property at a higher amount, thereby resulting in greater surplus proceeds to
apply to the FTL balance. The redemption
time period is 120 days from the date of the foreclosure sale, although certain
States grant a longer redemption period.

·The Federal Government may also release its
right of redemption.The release of the
right of redemption process generally begins with a request from the
purchaser.The Advisory then determines
whether the release has value by considering if there is equity in the property.For example, there may be cases with equity
that is insufficient to cover the expenses associated with redeeming and
reselling the property, but the release of the right of redemption would still
have value to the purchaser, such as an investor.If the Advisory determines there is no value,
it will issue a certificate to the purchaser advising that the Federal
Government will not exercise its right of redemption.If the right of redemption is released for
value, the Advisory collects the funds, applies them to the FTL balance, and
then issues the certificate to the purchaser.

The record number of mortgage foreclosures has caused
a significant increase in the number of foreclosure case receipts.Figure 2 shows that from Fiscal Years 2008 to
2009, the Advisory experienced a 7 percent increase in judicial foreclosure
receipts and a 63 percent increase in non-judicial foreclosure receipts.During this time period, the Advisory
experienced a 44 percent increase in its overall foreclosure inventory.

Figure 2:Inventory of Judicial/Non-Judicial
Foreclosure Cases

Category

Receipts
Fiscal Year 2008

Receipts
Fiscal Year 2009

Increase/(Decrease)

Redemptions

607

566

(7 percent)

Releases

346

540

56 percent

Judicial

9,632

10,308

7 percent

Non-judicial

20,290

33,116

63 percent

Total

30,875

44,530

44 percent

Source: Fiscal Years
2008 and 2009 Collection Activity Reports.

The Foreclosure Program is one of various programs within
the Advisory.Other Advisory programs
include discharge and subordination applications, litigation cases, NFTL non-attachments,
withdrawal of NFTS requests, IRS seizures, the Trust Fund Recovery Penalty, and
aspects of the Taxpayer Advocate.Due to its limited amount of resources, Advisory management has
established three levels of priorities to maintain their workload.While the specifics of these priorities may
be rearranged and adjusted as needed after management approval, cases from
judicial and non-judicial foreclosure programs generally are medium-priority.[6]The levels of priorities allow the Advisory
to dedicate its resources to work cases that are higher profile or generate
greater internal revenue.

This review was performed at thelocal Advisory Units within the Small Business/Self-Employed
Division in Laguna Niguel, California; Jacksonville and Plantation, Florida; Chicago,
Illinois; and Oklahoma City, Oklahoma, during the period October 2009 through May
2010. We conducted this performance
audit in accordance with generally accepted government auditing standards.Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objective.We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objective.Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I.Major contributors to the
report are listed in Appendix II.

Judicial foreclosures require the involvement of the local
court system. Because the judicial
foreclosure process involves the courts, the USAO is the primary control point
for this type of foreclosure, rather than the IRS Advisory.In a judicial foreclosure, the United States
should be named party to the suit if an NFTL was filed prior to the
commencement of the suit.In such a
suit, the USAO acts as a representative for the Federal Government by
collecting funds that may result from the foreclosure suit.Although it does not have jurisdiction, the
Advisory provides the USAO with information that is necessary to protect the Federal
Government’s interest, such as lien information and recommendations on
collection actions.We reviewed the
coordination between local Advisory offices and the USAO and identified some
areas that could be improved.Specifically, we identified inconsistencies in how local Advisory
offices coordinate information related to surplus proceeds and redemption
rights.

The Advisory did not always follow up with the USAO

The
USAO must file a motion to participate in a surplus funds hearing and will need
a statement of the lien balance due for this hearing.Normally, the USAO sends the Advisory the
relevant foreclosure documentation, usually a Summons and Complaint, along with a request for the statement of
lien balance due.When the Advisory receives this request, it
should screen the documents against the NFTL files to determine the outstanding
balance on the lien.In cases where
records indicate there is no outstanding liability on the lien, the Advisory
will advise the USAO, who will file a disclaimer on behalf of the United States.In cases where there is an outstanding
liability on the lien, the Advisory will send the appropriate information to
the USAO, usually a Declaration of
BalanceDue, which will then be
used in court to collect the surplus proceeds.

We judgmentally selected ***1*** cases with potential surpluses
obtained from 2 Advisory locations to determine if the Federal Government’s
interest was protected.Because the
Advisory does not have the jurisdiction to file the claims and collect the
surplus proceeds, we determined how information was shared and coordinated
between the Advisory and the USAO.In
***1*** (30
percent) of the cases, the Advisory contacted the USAO, verified the exact
amount collected from surplus proceeds, and conducted research to ensure that
payment was applied to the taxpayer’s account. In ***1*** (20 percent) cases, the Advisory verified
there were no surplus proceeds as a result of the foreclosure sale.However, in ***1*** (50 percent) cases, no follow up
or research was conducted before the case was closed.Because the Advisory did not follow up with
the USAO on cases with known potential surplus proceeds, the IRS did not know
if claims were filed timely or if any surplus proceeds were collected.

In addition, the purchaser of a foreclosure property may
request the Federal Government release its right of redemption.The authority to release the right of redemption
on judicial foreclosure properties is delegated to the USAO.[7]In such cases, the purchaser should submit
an Application for Release of Right of Redemption in Respect of Federal Tax
Liens (Form OBD-225) to the USAO.Upon
receipt of Form OBD-225, the USAO should forward the application to the
Advisory.The Advisory will determine if
the Federal Government has a right to redeem the property and will offer a
recommendation as to whether or not to release the right of redemption.The Advisory may also determine if the right
of redemption has any value (or a value greater than any minimum value established
by the local USAO) by considering if there is equity in the property.The Advisory should then return the completed
Form OBD-225 with its recommendation to the USAO.The USAO is then responsible for issuing the
certificate to the purchaser if the release is granted, collecting the money
for the release, and applying it to the outstanding tax lien balance.

Similarly, our
review of 20 cases with requests for releasing of the right of redemption showed
the Advisories did not always follow up with the USAO to determine if
IRS recommendations were followed.In 11 (55 percent) of the 20 cases, follow up
was not necessary because the Advisory made no recommendations to the
USAO.In 3 (15 percent) cases, the
Advisory followed up to obtain a copy of the response letter submitted to the
purchaser from the USAO and a copy of the release of right of redemption
certificate.However, in 6 (30 percent)
cases, the Advisory did not determine if the purchaser
was issued a certificate for the release of right of redemption or if any
payments were applied to the taxpayer’s account.

Although there was
coordination between the Advisory and the USAO in some cases, the Internal
Revenue Manual does not require the Advisory to conduct followup actions. This condition allows local Advisories
flexibility on how to balance resources with workload and other priorities, but
also creates inconsistencies.If
the Advisory does not follow up, the IRS may not know if information gathered,
prepared, and provided to the USAO was useful and protected the interests of
both the IRS and the taxpayers.

The Advisory does not
always have sufficient information to properly consider redemption rights

In addition to collecting surplus proceeds, the Advisory and
the USAO may consider redemption of a property.To do so, the Advisory needs to receive foreclosure sale information
from the USAO.The Advisory can examine
the foreclosure sale results and determine if a property has potential for
redemption.If the Advisory chooses to
redeem a property that was sold in a judicial foreclosure, it is the Advisory
that will execute the redemption process, not the USAO.

In order for the Advisory to make a proper
decision about whether to redeem the property, it must receive from the USAO
the Report or Certificate of Sale and
any other information relevant to the sale.However, our review of 10 judicial foreclosure cases with potential
surpluses showed that, in 6 (60 percent) cases, the Advisory received only a
request for a balance due amount from the USAO, and the Report or Certificate of Sale was not provided after the
foreclosure sale. As a result, the
Advisory could not make a redemption determination.

We were advised that the USAO and the local Advisory offices
had mutually agreed the USAO would not send the Summons and Complaint and the Report
or Certificate of Sale to the Advisory for every case.In one location, the USAO did not have
sufficient staffing to process the significant number of foreclosures, so
information was provided for only those cases that the USAO believed had
redemption potential.In addition, we
were advised the Advisory did not have sufficient staffing to review and respond
timely or the space to store the documentation.

When the Advisory does not have adequate
information to make a proper determination about exercising
its right of redemption, there is a risk of the taxpayer missing an opportunity to reduce the amount of taxes owed
by collecting additional revenue on the FTL.

Recommendations

The Director, Collection, Small Business/Self-Employed Division,
should ensure:

Recommendation 1:When solicited by
the USAO, the Advisory provides timely information regarding the application of
any surplus proceeds and timely recommendations regarding the value of any
releases of rights of redemptions.

Management’s
Response:IRS management agreed
with this recommendation.A Director,
Advisory, Insolvency, and Quality yearly memorandum will reinforce the Internal
Revenue Manual guidance for identifying, entering into the Integrated
Collection System, and closing cases.It
will also address the need for timely responses to the USAO regarding
recommendations for surplus proceeds or release of rights of redemption.In addition, the foreclosure and redemption
practices will be submitted for consideration as a topic for the next available
revenue officer Continuing Professional Education training program.

Management’s
Response:IRS management agreed with this recommendation
and will look into the Advisory opening a dialogue with the USAO as appropriate
and, as resources allow, ensuring receipt of the information needed to consider
the recommendation.

Unlike
judicial foreclosures, the Advisory has control over the non-judicial
foreclosure cases when the property has an NFTL attached.Before
the foreclosure sale, the settlement attorney or other entity conducting
the sale should submit a timely and adequate notice of sale to the IRS.A proper notice to the IRS acts to discharge
the FTL/NFTL from the property.If a
proper notice is not given to the Advisory, the property may be sold with an
FTL still attached.[8]Our review showed the Advisory was not always
consistent when processing non-judicial mortgage foreclosure cases.Specifically, we identified inconsistencies
related to:

Information provided to the public for
the timeliness of notices of sale.

Evidence supporting the rejection of notices
of sale.

Decisions about releasing the rights of
redemption.

The criteria that establishes
the timeliness of the notice of sale is inconsistent

The Internal
Revenue Code (I.R.C.) requires the settlement attorney or other entity
conducting the sale to submit a notice of sale in writing, by registered or
certified mail or by personal service, not less than 25 days prior to the
non-judicial foreclosure sale.The
notice should be sent to the local Advisory office where the sale is to be held
and must include information such as the contact information of the person
submitting the notice of sale, legal description of the property, and
information from the NFTL.If the notice
is not received timely, or if it does not include all of the required
information, the lien will still be attached to the property unless corrective
actions are taken.

IRS
management told us the I.R.C. requires that the postmark date be used to
determine if the notice of sale is timely.[9]If the postmark date is at least 25 days
prior to the sale date, the notice is considered timely and the Advisory should
review the notice for adequacy.However,
information provided to the public states timeliness is established by the
receipt date—not the postmark date.Specifically,Notice of Nonjudicial Sale of Property and
Application for Consent to Sale (Publication
786) states (emphasis added), “The 25-day
period commences upon receipt of an
adequate notice of non-judicial sale;”[10] and Notice of Inadequacy (Letter
1840)[11]states “…so thatwe receive it at least 25 days before the
sale.”

Without
consistent guidance, there is a risk that notices of sale will be improperly
rejected or improperly accepted as timely.IRS management advised us Publication 786 and Letter 1840 have not beenrecently updated and are inaccurate.Management also advised us the Internal
Revenue Manual is being revised and they will ensure the criteria are
consistent with the I.R.C.

The
Advisory is not always providing enough evidence to support the rejection of a
notice of sale

When the Advisory
receives an adequate notice of sale from a foreclosing party, it needs to be properly
reviewed to determine if the Federal Government has an interest in the
foreclosure property. For example, the Advisory determines if the FTL on
the property is still valid[12] and if the foreclosed property owner is the
same taxpayer responsible for the FTL. If the Advisory determines the Federal
Government does not have an interest in the foreclosure case, it will file the
notice and take no further action on the foreclosure case. These cases
are referred to as rejected cases.

We reviewed a judgmental
sample of ***1*** non-judicial rejected notices of sale obtained from 2 Advisory
locations to determine if the notices were rejected for proper reasons.
Our review showed:

In ***1*** (76 percent) cases, the Advisory
screened the notices of sale and provided sufficient support for these
decisions.For example, the notices
had “FTL has expired” written at
the top of the page, which supported why the Federal Government had no
interest in the property and the basis for rejection.

In ***1*** (17 percent) cases, there was
insufficient documentation to support why the notice had been
rejected. We contacted the Advisory office that had processed these
notices and were advised that further research had been conducted using
external sources to justify why the case was rejected (for example, county
property records).However, without
the documentation from the external research, we could not verify why
these cases were rejected.

In ***1*** (7 percent) cases, there was
insufficient justification to reject the case. For example, ***1***.

Although we ultimately agreed with the Advisory decisions
for the ***1*** (17 percent) cases with insufficient documentation, we believe it is
important that the cases include an explanation for rejection.It was necessary to perform additional
research to identify why these cases were rejected, so it is unclear how management
ensured Advisory employees were making the correct decision.We did identify ***1***cases that were rejected
improperly, which supports the need for sufficient evidence in the file.Management needs evidence to be available to
provide proper oversight.

IRS management
advised us that non-judicial foreclosure work is sometimes set aside due to
insufficient staffing and to ensure other high-priority work is completed
timely.However, because employees had
already taken the time to work the cases, it is important that the file contain
the evidence that the research was completed properly so management can ensure
the correct decisions were made.When
the notices of sale are not properly screened or are incorrectly rejected, the
IRS risks losing opportunities for collecting potential revenue, and the
taxpayer may lose an opportunity to reduce his or her tax liability.

The Advisory offices are not consistently making a determination
when processing release of the right of redemption requests

When a party buys a property with
an FTL at a non-judicial foreclosure sale, they may request the IRS release its
right of redemption.For example, the purchaser may wish to
occupy the property within the 120-day period without fear of losing it to
redemption. Similarly, a purchaser who is an investor might want to
resell the property to a third party within the 120-day period without the
right of redemption attached.

Most actions involved in releasing the right of redemption
are taken by the Advisory. The Advisory
should determine if the foreclosed property meets any local criteria for
redemption, such as equity in the property.If the Advisory determines that it is not in
the Federal Government’s interest to exercise its redemption right, it may
recommend the release of the Federal Government’s right for redemption.

The
Advisory will also determine if the release has any value.The value is determined by factoring in any
equity amount on the foreclosed property after the sale.If there is no equity, the
release may have no value.Any payment secured for the release
of the right of redemption should be applied to the taxpayer’s outstanding
liability.From 2 Advisory locations, we reviewed a judgmental sample of 20 cases involving
a request for release of the right of redemption to determine if the Advisory
was making the proper determinations. Our
review showed:

Inconsistent determination of the value for the release.For example, ***1***

Untimely processing of
release requests caused the redemption period to expire before a
determination could be made in three cases.

Varying degrees of
communication between the Advisory and the purchaser.For example, ***1***

The Internal Revenue Manual does not provide specific
guidance regarding value or equity determination when considering a request for
the release of the right of redemption.With
this flexibility in the process, it creates an opportunity for inconsistent taxpayer
treatment. This flexibility also made it difficult to assess whether
the Advisory made appropriate decisions for the value for the releases.

IRS management advised us that it is not feasible to
implement standard procedures that determine the value of the release at a
national level.Geographic location has
an impact in determining property values and foreclosure trends, including the
release value.In addition, the Advisory
has limited resources and its strategy is to put its efforts into the programs
that have a greater potential for return.This focus may result in different priorities in different Advisory
locations, which may create inconsistencies in how cases are being worked.

In addition, IRS management believes if the need was urgent,
the purchaser would follow up with the Advisory, and then the Advisory would be
responsive.As a result, the burden is
on the purchaser to obtain the release timely.

Recommendations

The Director, Collection, Small Business/Self-Employed
Division, should ensure:

Recommendation
3:IRS communications with the public are
consistent with the I.R.C. and Internal Revenue Manual.Specifically, Letter 1840 and Publication 786 should be consistent with the I.R.C.
and Internal Revenue Manual regarding timeliness for a notice of sale.

Management’s
Response: IRS management agreed with this recommendation and is
addressing this change. The IRS is
currently revising Letter 1840 and will include Publication 786 and other
foreclosure and redemption products in this revision process.

Management’s
Response:
IRS management agreed with this recommendation. The Director, Advisory, Insolvency, and
Quality yearly memorandum establishing work priorities will reinforce the Internal
Revenue Manual guidance for identifying, entering into the Integrated
Collection System, and closing cases, including the need for appropriate
history notations when closing or rejecting cases.

Recommendation 5:Releases of the
rights of redemption are timely and appropriate.

Management’s
Response:
IRS management agreed with this recommendation. The Director, Advisory, Insolvency, and
Quality yearly memorandum establishing work priorities will reinforce the Internal
Revenue Manual guidance for identifying, entering into the Integrated
Collection System, and closing cases, including the need for timely release of
rights of redemption when appropriate, along with a history notation on how or
why rights of redemption were or were not pursued.

Our overall audit objective was to determine whether the
Small Business/Self-Employed Division’s Collection function effectively and
efficiently protects the Federal Government’s interest during foreclosure[13]
proceedings when there is an NFTL filed.To accomplish this objective, we:

I.Identified the IRS’ procedures and guidelines when a
property subject to an NFTL is going through foreclosure proceedings.

A.Reviewed
the Internal Revenue Manual guidelines, Law Enforcement Manual guidelines, and Integrated
Data Retrieval System queries.We interviewed
the Advisory office to identify its role and involvement during
foreclosures.We also reviewed all types
of cases for both judicial and non-judicial foreclosures including: surplus
proceeds, rejected cases, redemptions, and release of rights of redemption.

B.Determined
if the process between judicial and non-judicial foreclosure is the same in all
locations.

C.Reviewed
the overall foreclosure process by sending a questionnaire to 10 judgmentally
selected Advisory locations having the highest number of foreclosure
cases. We judgmentally selected these 10 locations to ensure a
greater representation of the foreclosure process per territory offices.

II.Analyzed the data related to judicial and non-judicial
foreclosure actions and identified trends and a population from which to select
samples.Because local laws affect foreclosure
proceedings, we selected a judgmental sample of judicial and non-judicial foreclosure
cases. We used judgmental sampling
because the population for each type of case was unknown.The locations were selected by identifying
the States having the highest numbers of foreclosure filing rates.

A.Obtained
previous and current key statistics related to judicial and non-judicial
foreclosure actions from the Advisory office and identified where the IRS is
focusing its resources. In addition, we
obtained statistics from external sources such as RealtyTrac®.

B.Extracted
the inventory of cases assigned to the Advisory office from the Integrated
Collection System.

1.
Obtained
the records from the history table on the Integrated Collection System open and
archive files that were closed between October 1, 2007, and June 30, 2009.

2.From the records obtained in Step II.B.1., we
identified the redemption, release of right of redemption, judicial, and
non-judicial foreclosure cases. In
addition, we identified the location of the Advisory office that worked the
case.

3.
Validated
the data extracted from the Integrated Collection System by comparing the
results with various statistics from IRS reports.

C.Analyzed the Automated
Lien Systemdatabase and
identified any information on the properties for which an NFTL was
filed.In addition, we conducted a comparative analysis between records
obtained from the Advisory Office and the Automated Lien System database.

D.Evaluated
the prior information and identified the locations to use for selecting the samples
for our case review.

III.Determined if the Federal Government’s interest is
protected during judicial foreclosure.

A.Determined
the work relationship between the USAO and the Advisory office by interviewing
Advisory office management and a USAO official for corroboration of procedures.

B.Obtained
a judgmental sample of judicial foreclosure cases worked in the Advisory office
to determine if the USAO executed the recommendation obtained from the Advisory
office, such as filing a claim to collect from surplus proceeds and releasing
or exercising the rights of redemption.We selected a judgmental sample because we were not able to
identify the population of cases received in the Advisory offices and because
there was a limited number of cases available for review. The types and numbers of cases reviewed
are as follows:

1.
Surplus
Proceeds ***1***
cases

2.
Release
Right of Redemption20 cases

IV.Determined if proper actions were taken for
non-judicial foreclosures by the Advisory office to protect the Federal
Government’s interest.

A.We
obtained a judgmental sample of non-judicial cases from the inventory of Notices
of Sale maintained at the Advisory office.We determined the locations and criteria for the selection of the sample
after we completed Step II.We selected a judgmental sample because we were not able to
identify the population of cases received in the Advisory offices and because
there was a limited number of cases available for review. The types and numbers of cases reviewed
are as follows:

1.
Surplus
Proceeds20
cases

2.
Release
of Right of Redemption20 cases

3.
Redemption10 cases

4.
Rejected
Cases ***1*** cases

B.Determined if the notice of sale was properly
reviewed for adequacy and timeliness by the Advisory office.

C.Determined
if the Advisory office took appropriate actions and timely followed up to
secure collection of surplus proceeds from non-judicial foreclosure sales.

D.For
rejected cases, identified the reason and criteria used for rejecting a case
and determined if correct decision was made.Also, we determined whether there is more the IRS could have done in
this process to monitor cases once rejected.

E.Determined
if the Advisory office made the correct decision to exercise or release the
right of redemption of the property sold.

F.Discussed our conclusions with IRS management.

Internal controls methodology

Internal controls relate to
management’s plans, methods, and procedures used to meet their mission, goals,
and objectives. Internal controls
include the processes and procedures for planning, organizing, directing, and
controlling program operations. They
include the systems for measuring, reporting, and monitoring program
performance. We determined the following
internal controls were relevant to our audit objective: the policies, procedures, and practices used
by the IRS Advisory unit to manage the mortgage foreclosure program as it
relates to surplus proceeds, redemption, and release of right of
redemption. We evaluated these controls
by reviewing applicable manuals and documentation, interviewing management from
the Advisory unit, interviewing attorneys from the USAO, and reviewing a judgmental
sample of judicial and non-judicial mortgage foreclosure case files.

Loan
with an interest rate that can vary up or down at certain intervals (periods)
and within certain limits (caps); loan is secured by house on which lender
will foreclose if loan is not paid.

Automated Lien
System

Used to
generate Notices and Releases of Federal Tax Liens, as well as to generate
levy documents and letters. The
purpose of a tax lien is to put the public on notice that a lien has been
placed on a taxpayer’s property. Once
the information is released to the State recording offices and the District
of Columbia Recorder of Deeds, it is public information and is not of a
confidential nature.

Collection
Statute Expiration Date

The expiration of the time period established by law
to collect taxes. It is normally 10 years from the date of the assessment.

Equity

Determined by comparing the property value to the foreclosure sale
price. If the property was sold for
less than its value, the Advisory will determine that there is equity in the
property and may recommend releasing the right of redemption for a higher
value than compared to a property that has no equity.

Federal Tax
Lien

The claim that the IRS has the authority to attach to
a taxpayer’s assets when the taxpayer neglects or refuses to pay his or her unpaid
tax.

Foreclosure

The process that allows a lender to recover the amount
owed on a defaulted loan by selling or taking ownership (repossession) of the
property securing the loan. State law
generally governs foreclosures, and rules may vary between States.

Housing Unit

A house,
apartment, mobile home, group of rooms, or single room that is occupied (or
if vacant, is intended for occupancy) as separate living quarters.

Integrated
Collection System

An information
management system designed to improve revenue collections by providing
revenue officers access to the most current taxpayer information while in the
field, using laptop computers for quicker case resolution and improved customer
service.

Internal
Revenue Code (I.R.C.)

Federal tax law begins with the I.R.C., enacted by Congress
in
Title 26 of the United States Code. It
is the main body of domestic
statutory tax law of the United
States organized topically, including laws
covering the income tax, payroll taxes, gift taxes, estate taxes, and
statutory excise taxes. Its
implementing agency is the IRS.

Judicial
Foreclosure

Foreclosure action executed by the court.

Mortgage

A conveyance of an interest in real property, given as
security for the payment of a debt. An
agreement between two parties: borrower
and lender.

Non-Judicial Foreclosure

Foreclosure on
a mortgage without filing a lawsuit or obtaining a court order; generally
occurs because a borrower has signed a document such as a deed of trust that
gives the trustee the right to sell the property to pay off the debt.

Notice of Default

The
initial document (non-judicial) filed by a trustee that starts the
foreclosure process, usually after the occurrence of a default under the deed
of trust or mortgage.

Notice of
Federal TaxLien

Public notification of creditors that the United States Government has a
claim against all property, and any rights to property, of a taxpayer who
received a Federal Tax Lien.This
includes property owned at the time the notice of lien is filed and any
property acquired thereafter.This
notice is used by courts to establish priority in many situations, including
bankruptcy proceedings or sales of real estate.

Notice of Lis Pendens

Notification of pending lawsuit (Lis Pendens). The initial document (judicial) filed by an
attorney or trustee that starts the foreclosure process after the occurrence
of default under the deed of trust or mortgage.

Notice of Sale

If a homeowner does not make up the mortgage payments,
a Notice of Sale will be mailed to the homeowner, posted in public places,
recorded at the county recorder’s office, and published in area legal
publications. This notice will include
the time, place, and date the home will be sold at a foreclosure sale.

Redemption

Allows the IRS
to acquire title to real estate by buying the property from the purchaser who
acquired title at the foreclosure sale.By redeeming the property, the Government secures the equity and once
sold, applies it to the taxpayer’s liabilities.

Release
ofRight of Redemption

The United States
may release its right of redemption in exchange for the value of this
right.In exchange for the value of
this right, the United
States will issue a certificate stating
that it will not exercise the right of redemption.Certificates of Release of Right of
Redemption can be issued in both judicial and non-judicial foreclosures.

Surplus

Upon the
completion of the foreclosure, generally the clerk of the court sells the
property to satisfy the mortgagee’s judgment.If the sale nets more money than the amount owed to the first
mortgagee, this excess is called a “surplus.”

We have reviewed your draft report, "Coordination
and Procedures for Foreclosures Can Be Improved.”

We agree with the findings of the report and
the recommendations. We appreciate that TIGTA has taken the time to recognize that
foreclosures and redemptions are a very complicated segment of the law. For example,
TIGTA recognizes that judicial foreclosures involving federal tax liens are the
responsibility of the United States Attorney (USAO) and that Advisory in IRS Collection’s
Advisory, Insolvency, and Quality (Advisory) assists the USAO when requested and
responds to the USAO based on the practices of the local USAO.

The TIGTA also recognizes that non-judicial
foreclosure sale notices are often sent to the IRS in bulk by companies trying
to cover all bases even if there is no public Notice of Federal Tax Lien (NFTL)
or even a tax liability. These bulk packages contain 50 to 75 notices each and
must be checked first to see if there is even a. tax liability involved. We appreciate
TIGTA recognizes we cannot and do not enter all receipts into our Integrated Collection
System (ICS). We enter into ICS only those cases where action is appropriate after
checking that a taxpayer can be identified, a current public NFTL is on file,
and the lien attaches to the property being foreclosed.We agree with TIGTA that clearer definitions
that follow the Internal Revenue Code (IRC) and Treasury Regulations are needed
in the Internal Revenue Manual (IRM) and IRS published documents of: what an effective
notice s; what an adequate notice is; and the type of notice it takes to discharge
or remove a federal tax lien through a foreclosure sale.

We agree that our foreclosure and redemption
programs are important. We recognize that the economy and, in particular, the
current state of the real estate market have dramatically increased receipt of these
cases. We also recognize that, as
property values drop, many properties going through foreclosure have lost
equity. Since the federal tax lien attaches to equity, ultimately less funds
are available for the IRS to apply to the tax lien debt.

The IRS recognizes the need to improve collection
actions on foreclosure and redemption cases. We previously identified some of
the issues included in this report and have already taken steps to implement
several corrective actions to improve performance in this area.

In August, 2003, we initiated revisions to
the IRM to clarify instructions and add follow-up deadlines for case actions.
The revised IRM 5.12.4, Judicial/Nonjudicial
Foreclosures, and IRM 5.12.5, Redemptions,
were published in June 2010 after completing negotiations with the National Treasury
Employees Union. We will continue to look for ways to clarify these instructions.
Letter 1840, Notification of Inadequacy
of Nonjudicial Sale Notice, has been revised and is undergoing review by the
notice clarity group. Publication 786, Notice of Nonjudicial Sale of Property and
Application for Consent to Sale, is being revised and will be sent out for
clearance as soon as the draft is complete.

Attached is a detailed response outlining our
corrective actions. If you have any questions, please contact me, or a member
of your staff may contact Frederick W. Schindler, Director, Collection Policy
at (202) 283-7650.

Attachment

Attachment

The Director, Collection, Small Business/Self-Employed
Division, should ensure:

RECOMMENDATION
1:

When solicited by the USAO, the Advisory provides
timely information regarding the application of any surplus proceeds and timely
recommendations regarding the value of any releases of rights of redemptions.

CORRECTIVE
ACTION:

We agree with this recommendation: 1) A Director,
Advisory, Insolvency, and Quality yearly memorandum establishing work priorities
will reinforce the IRM guidance for identifying, entering into ICS, and closing
cases. This memo will address the need for timely responses to the USAO
regarding recommendations for surplus proceeds or release of rights of redemption,
along with an appropriate history notation.

2) Foreclosure and redemption practices will be
submitted to Training for consideration as a topic for the next available
Revenue Officer Continuing Professional Education (CPE) training program.

1) The Director, Advisory, Insolvency, and
Quality SB/SE will advise the Director, Collection SB/SE of any delays in implementing
this corrective action.

2) The Director, Collection Policy SBISE will
advice the Director, Collection SB/SE of any delays in implementing this
corrective action.

The Director, Collection, Small
Business/Self-Employed Division, should ensure:

RECOMMENDATION
2:

The Advisory has sufficient information to
consider potential redemption of foreclosed properties.

CORRECTIVE
ACTION:

We agree with TIGTA that certain information
must be provided by the USAO before the Advisory can consider redemption of
foreclosed property. We will look into the Advisory opening a dialogue with the
USAO as appropriate and as resources allow to ensure receipt of the information
needed to consider the recommendation.

The Director, Advisory, Insolvency, and
Quality SB/SE will advise the Director, Collection SB/SE of any delays in implementing
this corrective action.

The Director, Collection, Small Business/Self-Employed
Division, should ensure:

RECOMMENDATION
3:

The IRS communications with the public are consistent
with the Internal Revenue Code (IRC) and Internal Revenue Manual. Specifically,
Letter 1840 and Publication 786 should be consistent with the IRC and Internal
Revenue Manual regarding timeliness for a notice of sale.

CORRECTIVE
ACTION:

We agree with this recommendation and this
change is being addressed. We are currently revising Letter 1840 and will
include Publication 786 and other foreclosure and redemption products in the
revision process.

We agree with this recommendation. A
Director, Advisory, Insolvency, and Quality yearly memorandum establishing work
priorities will reinforce the IRM guidance for identifying, entering into ICS,
and closing cases, including the need for appropriate history notations when closing
or rejecting cases.

The Director, Advisory, Insolvency, and
Quality SB/SE will advise the Director, Collection SB/SE of any delays in implementing
this corrective action.

The Director, Collection, Small Business/Self-Emp1oyed
Division, should ensure:

RECOMMENDATION
5:

Release of Rights of Redemption are timely
and appropriate.

CORRECTIVE
ACTION:

We agree with this recommendation. A Director,
Advisory, Insolvency, and Quality yearly memorandum establishing work
priorities will reinforce the IRM guidance for identifying, entering into ICS,
and closing cases, including the need for timely release of rights of
redemption (RRR) when appropriate, along with a history notation on how or why
RRR was or was not pursued.